TSCB 2: What's my year end and which tax year?

The last post in the TSCB (Tax for Small Crafting Businesses) Series covered how to work out whether you’re trading for tax purposes and so what to do to satisfy HMRC (HM Revenue & Customs) requirements to get you properly set up with them for your trading life.
It also explained how to work out the date your trading started (commencement date in accounting speak), your commencement date is the date you put into Box 14 on the CWF1 form to register your business with HMRC.

Once you’ve got your commencement date you can then sort out what income & expenses fit into each tax year by working out your business year end date and trading periods.

Basics first:

• Your business year end is the date to which you make up your books or accounts on an annual basis. This will usually be the same date every year.

• Your trading period (or accounting period) is the 365 days between your year beginning and your year end once you’ve got going. If you are just starting, then it’s the shorter period between your commencement date and your first year end.

• Your basis period is the period you are actually taxed on (if you have the same year end as the tax year end, your trading and basis periods will be the same).

• The UK tax year starts on 6 April and ends a year later on 5 April. So for example the last tax year 2010 started on 6 April 2009 and finished on 5 April 2010, (and for clarity, tax year 2010 figures have to be filed with HMRC by 31 January 2011).

• Most people don’t start their business on 6 April, they start it sometime during the year.

• New businesses usually have a short trading period in their first year, to align their business year end with the tax year end.

• You can change your year end date later on if it turns out to be too difficult for you to keep your figures straight (because of the HMRC rules) or to give you a better cashflow advantage, but there are special rules.

Let’s take a simple example; a crafter decides to start a business as a New Year resolution. They spend a couple of months thinking about it and in the summer actually start making product, so they are ready to start selling on 1 October 2009 (commencement date) and open a shop or offer products for sale that day. I’ll be covering what happens in the period BEFORE the commencement date, that is the Pre-Trading Period (in accounting speak) in another article in the Series. This article deals with what happens from Commencement Date onwards.

So this new business has a start date of 1 October, and then you need to ask is what date to choose as a year end and how long is the trading period?

To keep your tax affairs very simple, choose a year end that matches the tax year.

• The tax year ends on 5 April.

• So for your first tax year, you would have a trading period including all your income and expenses for the six month (and a few days) period from commencement date of 1 October 2009 to 5 April 2010, and this information goes into your 2010 tax return to be filed by 31 January 2011.

• And for your second tax year, your trading period would be for the full year from 6 April 2010 to 5 April 2011, and this information goes into your 2011 tax return to be filed by 31 January 2012.

• But, most people keep track of their income and expenses by calendar month, and that little adjustment for the first 6 days in April each year is a bit of a fiddle. So, HMRC let you dump those 6 days into the following tax year to make life easier (it’s pretty much the only time you can move income or expenses around between tax years).

• So if you want to, you could have a first accounting period running from 1 October 2009 to 31 March 2010, and all the following accounting periods running from 1 April 2010 to 31 March 2011.

• So, you choose either a year end date of 5 April or 31 March, and you keep doing your accounts to that date for as long as you have your business.

Ok, I want to keep it simple and I’ve picked my year end date, how do I get HMRC to agree with my choice?

• We have Self Assessment in the UK, HMRC don’t ‘agree’ to anything, it’s your personal responsibility to know what the rules are and to get it right, HMRC merely check up every so often that taxpayers are doing this.

• But they do need to know what year end date you’ve chosen otherwise they won’t know how to tax you. You tell HMRC your year end date in each annual tax return in the section dealing with Self Employment.

• If you were doing your tax return on paper (too late for this year) the relevant box is No.7 in the first section of the Short Self-Employment pages form SA103s. Sadly when you’re doing it online that’s no help at all, as what you’ll actually see is a question asking about ‘the date you made your books or accounts up to’ or similar, but it should help when you print out your return to check it before submitting it online so you can see you have actually filled the right box in correctly.

More information from HMRC here

Hmm, I didn’t do that when I started, my year end doesn’t align with the tax year. What happens to my business now?  Well, it gets a bit complicated and easy to mess up. The next article will be on what happens if you have a business year end that’s different to the tax year end and about changing your year end date. Hopefully there’ll be a snappy title, but I doubt it!